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Managing Receivables: Establishing Effective Credit Policies for Customers

When selling on credit, businesses must develop clear policies to manage receivables effectively. It's essential to assess which customers to offer credit based on the 5 C's of credit: character, capacity, capital, collateral, and conditions. The length of the credit period should be carefully determined to ensure profitability, considering factors like price and variable costs. Offering more credit can attract more customers, but it also increases finance costs, especially at a 10% interest rate. Implementing cash discounts and robust collection policies can further mitigate the risk of non-payment.

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Managing Receivables: Establishing Effective Credit Policies for Customers

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  1. Managing Receivables Credit policy toward customers

  2. When selling on credit, businesses need clear policies about…..

  3. Which customers? Use the 5 C’s…

  4. Length of credit period determined by…

  5. Note contribution = price – variable cost = 40 – 20 = 20 • (or 50% of selling price) * More credit implies more customers.

  6. * The increase in finance costs assumes a 10% interest rate. There is no increase in non-payment added in this example.

  7. Cash discounts

  8. Collection policies: Steps can be taken to reduce the risk of non-payment

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